Blockchain technology: an imminent driver of investment and M&A

Blockchain technology has been making headlines since it emerged in 2009 in connection with the cryptocurrency Bitcoin. We’ve covered the potential use of Bitcoin in M&A transactions in previous articles in 2016 and 2014. As discussed in these articles, the volatility and lack of central authority has so far meant that the cryptocurrency plays a niche role in the capital markets.

However, blockchains – the technology behind Bitcoin – has been gaining ground for its exciting enterprise potential. We are already beginning to see companies racing to adopt this emerging technology, as more and more companies acquire the technology through M&A or amp up their research and development in this area.

What is blockchain technology?

A blockchain is essentially a digital ledger that can be independently verified by unrelated parties. The entries in the ledger are stored in blocks, each block containing a timestamp and a link to the previous block. The implication of this technology is that any information that appears on the ledger is immutable and, therefore, guaranteed to be authentic.

Blockchain’s enterprise potential

It is not hard to imagine the potential enterprise applications for a decentralized, tamper-proof database. Below are some key use cases.

Transaction settlement was one of the key reasons Bitcoin became popular. Blockchains can irreversibly and verifiably settle transactions in a matter of seconds without the need for a centralized, trusted intermediary such as a bank. When combined with the idea of smart contracts, which are contracts written into code and can be self-executing and self-enforcing, the possibilities are endless. For example, the San Francisco Stock Exchange recently hinted that it is aiming to “build the first smart contract-driven public platform for buying and selling US small business financial securities” using blockchain technology. Also, this year the Royal Bank of Canada released a plan to deploy a blockchain-based system for its loyalty rewards program which would allow users to collect and redeem points instantly.

Know Your Client (KYC) has been identified as an area that could stand to benefit by using blockchain technology. A 2016 survey by Thomson Reuters revealed that the average financial institution spends $60 million per year to meet their KYC obligations with some firms spending up to $500 million on compliance. A recent whitepaper by the FinTech Network argued that this cost could be mitigated by storing KYC data on an independently verifiable database such as on blockchains.

Investment in blockchain technology

Companies are rapidly catching on to the exciting potential of blockchain technology. Some companies, such as Airbnb and Spotify, have made significant acquisitions of blockchain-related startups. Other companies are exploring the technology by investing in research and development. In a Deloitte survey of 208 senior executives, 25 percent of the respondents indicated that their companies have already invested $5 million or more in blockchain technology. In fact, PwC reports that “nearly every financial institution” was involved in some kind of research involving blockchains. We look forward to seeing how this trend plays out.

The author would like to thank Daniel Weiss, summer student, for his assistance in preparing this legal update.

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